Eric M. KING, Plaintiff-Appellee, Cross-Appellant,
v.
IONIZATION INTERNATIONAL, INC., Andrew J. Pincon, and
Andromeda Pincon, Defendants,
and
Water Management, Inc. and Photozone, S.A., Intervening
Plaintiffs-Appellants, Cross-Appellees.
Nos. 86-2594, 86-2663.
United States Court of Appeals,
Seventh Circuit.
Argued April 15, 1987.
Decided Aug. 4, 1987.
Lawrence C. Gegun, Jenner & Blоck, Chicago, Ill., for intervening plaintiffs-appellants.
Richard C. Leng, Chicago, Ill., for plaintiff-appellee.
Before POSNER and COFFEY, Circuit Judges, and ESCHBACH, Senior Circuit Judge.
POSNER, Circuit Judge.
This litigation over liens in a patent license raises questions of Illinois lien and fraudulent-conveyance law--some of which, however, we are able to duck--plus jurisdictional issues, which we can never duck.
Andrew Pincon owns a patent (actually two patents, but we shall simplify the facts to make the opinion easier to follow) on the "photozone" process for purifying water. In 1977 he formed Ionization International, Inc. to exploit the process. He was its principal officer and shareholder. He gave the corporation an exclusive license to practice the patent in North America in exchange for the corporation's promise to pay him royalties on products using the patented process. In 1980 he sold 20 percent of the stock of Ionization to Eric King for $300,000. The purchase entitled King to a seat on Ionization's board of directors.
Shortly afterward, King and Pincon had a falling out, and King sued Pincon and Ionization. The suit was settled in 1981 by an agreement under which Ionization repurchased King's stock, giving King two promissory notes for a total of $320,000. The notes were secured by the patent license, but King failed to file the security agreement with the Illinois Secretary of State, which is the usual method of perfecting a security interest in Illinois. The settlement agreement entitled King to retain his seat on the board of directors but he resigned in favоr of his brother-in-law, John Kitanoja, who agreed to be King's representative on the board.
By the middle of 1983 Ionization was in deep financial trouble. It had defaulted on one of the promissory notes to King and was in danger of being forced into bankruptcy; it may already have been insolvent. It owed money to a number of other people as well, including Pincon--to whom it owed almost $160,000 in back wages and royalties and almost $106,000 for cash loans that he had made to the company--and Pincon's wife, Andromeda, who also worked for the company and who was owed more than $60,000 in back wages. At a meeting of the board of directors on September 27, 1983, Pincon proposed that the corporation issue fresh promissory notes to all its creditors (including the Pincons), secured by Ionization's assets--the principal asset being the patent license. The board, controlled by Pincon, approved the proposal, the action being reflected in the minutes of the board meeting. The notes were issued several weeks later. The total face amount of the notes was $428,000, of which $327,000 was for the Pincons. (We have rounded off all dollar figures to the nearest thousand.) John Kitanoja received a note for $7,000. At its meeting on January 26, 1984, the board unanimously approved the minutes of the previous meeting; Kitanoja was one of the directors who voted to approve them. It was also at this meeting that Kitanoja received his note, which he deposited in his safe-deposit box. The Pincons and the other recipients of the notes filed them promptly with the Secretary of State in an effort to obtain perfected security interests in the patent license and other assets of Ionization.
King brought this diversity suit in February 1984 to collect the unpaid balance of one of his notes, the other having been paid. He named as defendants Ionization and the Pincons, who had guaranteed the note. The district court entered a default judgment against thе defendants in April 1984, and proceedings to collect the judgment ensued before a federal magistrate. See Fed.R.Civ.P. 69. In June, King obtained a writ of execution--thereby at last perfecting his security interest. See Kaiser-Ducett Corp. v. Chicago-Joliet Livestock Marketing Center, Inc.,
By now it was 1985 and various creditors of Ionization, notably Water Management, Inc., intervened in the post-judgment proceedings. Water Management is another corporation formed by Andrew Pincon. Although he does not own any stock in it, he has served as its president, and one of its shareholders is a foreign holding company owned in part by a trust for the benefit of Pincon's children by a previous marriage; the record does not show how large the trust's indirect stake in Water Management is. In January 1985 Water Management had bought from Andrew and Andromeda Pincon the notes that Ionization had issued to them in 1983. Water Management had also purchased two judgments against Ionization, one in favor of the First National Bank & Trust Co. of Evanston аnd the other in favor of McWilliams, Mann & Zimmer.
Also intervening in King's suit against Ionization and the Pincons was Photozone, S.A., another corporation that Pincon had formed and that is owned in part by the foreign holding company that is a part owner of Water Management. Photozone had loaned Ionization some $20,000 and had been among the creditors to receive secured notes.
The magistrate ruled that King's judgment had priority over all of Water Management's and Photozone's claims except the claim based on the First National judgment, and over all other creditors' claims as well. She entered a final judgment for King under Fed.R.Civ.P. 54(b), retaining jurisdiction to determine whether he had collected part or for that matter all of the default judgment by selling goods covered by the Pincon patent license without paying royalties to Ionization. Water Management and Photozone have appealed, and King has cross-appealed in the hope of knocking out Water Management's claim based on the First National judgment.
Before we can reach the merits we must satisfy ourselves that we have jurisdiction of these appeals. If this were a bankruptcy proceeding, an order fixing priorities among creditors would be deemed sufficiently final to be appealable even under the new bankruptcy appeals statute (28 U.S.C. Sec. 158(d)), which makes only final orders appealable to the courts of appeals. See In re Wagner,
Treating the post-judgment proceeding as a separate lawsuit akin to a bankruptcy proceeding--and the functional resemblance is close, since the purpose of the post-judgment proceeding is to adjust rights among competing creditors--we must decide whether the order fixing priorities is enough like a conventional final judgment to be appealable even though proceedings to collect on the order are in process. See generally Ex Parte Farmers' Loan & Trust Co.,
A second question about finality is whether the judgment entered by the magistrate in the post-judgment proceedings was a final judgment directly appealable to this court or a mere recommendation to the district judge. The judge had ordered the magistrate "to conduct hearings, supervise and enter all orders on post judgment proceedings" in this case, pursuant to 28 U.S.C. Sec. 636(b)(1)(A). But that section merely authorizes the judge to "designate a magistrate to hear and determine any pretrial matter pending before the court.... A judge of the [district] court may reconsider any pretrial matter under this subparagraph (A) where it has been shown that the magistrate's order is сlearly erroneous or contrary to law." No provision expressly authorizes the judge to assign a magistrate to post-judgment proceedings, although we can think of no good reason not to allow such assignments and the statute does have a catch-all section: "A magistrate may be assigned such additional duties as are not inconsistent with the Constitution and laws of the United States." 28 U.S.C. Sec. 636(b)(3); cf. United States v. Curry,
The only part of the statute that expressly authorizes the magistrate to enter a final judgment appealable directly to the court of appeals is 28 U.S.C. Sec. 636(c); but as it is applicable to "any or all proceedings in a jury or nonjury civil matter," 28 U.S.C. Sec. 636(c)(1), it certainly is applicable to post-judgment proceedings in a civil case. However, the magistrate has jurisdiction under subsection (c) only when (so far as pertinent to this case) he (1) is "specially designated to exercise such jurisdiction by the district court" and (2) is acting "upon the consent of the parties." Id. The parties did not execute a consent in writing to the magistrate's exercise of jurisdiction under subsection (c) until several weeks after she entered the order that has been appealed to us, when they submitted a joint stipulation stating that the proceedings before the magistrate and the entry of the order had been with their consent. But this is adequate evidence of consent, in the circumstances. The statute does not require a specific form or time of consent or even that it be in writing (unless the jurisdiction is to be exercised by a part-time magistrate); and while many courts (including our own) refuse to infer consent from the parties' behavior, seе, e.g., Adams v. Heckler,
There may seem to be a question whether the magistrate was "specially designated," given that the district judge's order referring the case to the magistrate, which we quoted earlier, referred only to subsection (b)(1). As we read section 636(c)(1), however, the words "specially designated" refer to the order designating a given magistrate to exercise jurisdiction under subsection (c) rather than to the order referring the particular case to the magistrate. Cf. 28 U.S.C. Secs. 636(c)(2)-(c)(4); N.D.Ill.Rules 1.72(A)-(E), 2.41(A)-(B). At all events, whether considered the designation or the reference order or both, the judge's order, while unclear, is not fatally defective. The order authorized the magistrate to "enter all orders," and the magistrate and the parties have throughout treated this as an authorization to conduct proceedings under subsection (с). As the intention behind the order of reference is clear, we shall overlook the citation error. The deficiencies in the orders involved in Parks by Parks v. Collins,
The principal issue on the merits is whether King's security interest in Ionization's patent license has priority over the Pincon notes, bought by Water Management in 1985 and secured by the same asset. On the view we take, analysis should focus on whether the conveyance of a security interest to the Pincons back in 1983 was a fraud against King and other creditors of Ionization. See Ill.Rev.Stat. ch. 59, p 4. If so, they (and Water Management, as we shall see) cannot prevail over King's security interest, belatedly perfected though it was.
Had the notes not been supported by adequate consideration their issuance would have been a fraudulent conveyance per se, but King concedes there was adequate consideration--the Pincons really were owed all that money by Ionization for past wages, loans, and royalties. However, a transfer by a debtor to one creditor, even though for consideration, is still a fraud against other creditors if there is intent to defraud. See, e.g., Reagan v. Baird,
Before they did this, the Pincons were only unsecured creditors, and King was a secured creditor. The issuance of the notes backed by a security interest and the filing of that interest were designed to put the Pincons ahead of King. Although thе Pincons knew about King's unperfected security interest, this knowledge would not prevent them from getting a lien superior to his by winning the race to file. See Ill.Rev.Stat. ch. 26, p 9-312; UCC Sec. 9-312, official comment 5, example 2; 9 Anderson on the Uniform Commercial Code Sec. 9-312:15 (1985). And although the Pincons had guaranteed King's notes, their notes have ended up in the hands of Water Management, and the Pincons may not have enough assets to make good on the guaranty.
Pincon's knowledge of King's security interest, the guaranty of the debt to King, and the fact that Ionization was largely owned (and was controlled) by Pincon and had defaulted on its debt to King, warranted the district court in finding that Pincon had acted with fraudulent intent in causing Ionization to convey to him and his wife secured interests in the assets pledged to King. This is not merely a case of a debtor who, being unable to pay off more than one of his bona fide creditors, gives favorable treatment to one rather than paying all pro rata. That is allowed; but in Vinylast Corр. v. Gordon,
The Pincons and Water Management argue that King slept on his rights. The utter confusion of Illinois lien law, well discussed in the General Telephone opinion, cited earlier, makes such lethargy less blameworthy than it might otherwise be. In any event there is no defense of negligence--which laches, the principle invoked by the Pincons, resembles, see Piper Aircraft Corp. v. Wag-Aero, Inc.,
They also argue that King ratified the fraudulent conveyance by the action of his representative, Kitanoja, in accepting one of the notes and in voting to approve the minutes recording the issuance of the notes to the Pincons. However, Kitanoja testified, plausibly enough, that he had had no intention of ratifying the transaction but had been confused by the whole business; and neither the Pincons nor Water Management have shown they were prejudiced by the alleged ratification.
The issuance by Ionization of notes to Photozone should be analyzed similarly. Photozone may not be quite an alter ego of Andrew Pincon but it is close enough to one that the magistrate was justified in deeming the issuance of the secured notes to Photozone, like the issuance of the notes to the Pincons, a fraudulent conveyance.
The Pincons transferred their notes to Water Management--it is Water Management rather than the Pincons that is seeking to collect them--and we must see whether this makes a difference. Water Management was formed and led by Andrew Pincon, is beneficially owned (to what extent is unknown) by his children, knew the provenance of the notes and therefore was not a bona fide purchaser, and consequently acquired no better title to the notes, relative tо King, than the Pincons had had. Whatever Water Management paid for the notes was for the chance--no better than a gamble--that the notes could be collected, notwithstanding King's superior lien. And it is unclear whether Water Management paid anything. Although it gave the Pincons cash (25 cents on the dollar) for the notes, this may just have been a case of the Pincons' taking money out of one pocket and putting it into another. Water Management has never tried to enlighten the district court or us about the web of ownership interests in Water Management (or Photozone) that we suspect add up to ownership by Pincon and members of his family.
The remaining issues concern the McWilliams and First National notes. McWilliams had a judgment against Ionization and began a citation proceeding to collect it. Such a proceeding involves questioning the judgment debtor and examining his financial records in an effort to discover whether he has additional assets against which the judgment can bе levied; if so, the court has broad powers to assure that the assets are handed over to the creditor. A citation proceeding is apparently the only way to levy judgment in Illinois against a judgment debtor's intangible assets, such as a patent license. See Asher v. United States, supra,
If collection is not accomplished within six months, the citation proceeding terminates unless it has been extended. See Ill.Rev.Stat. ch. 110A, p 277(f). In this case, six months passed, and the proceeding (it seemеd) lapsed. Later King obtained his judgment against Ionization. Later still, Water Management--to which McWilliams had sold its judgment--obtained an extension of the citation proceeding. If the proceeding really lapsed, however, there was nothing to extend and the order was ineffective. But if, as Water Management argues, the extension was effective nunc pro tunc, then Water Management has a lien prior to King's.
The order did not purport to have retroactive effect, and may nоt have been intended to. The extension may implicitly have been conditioned on the proceeding's not having lapsed, a question the court may not have wanted to decide merely by granting the extension. The court may not even have known that the proceeding might have lapsed. In any event, as the magistrate correctly ruled, an order cannot be given retroactive effect when the effect is to destroy a subsequent lien. The office of a nunc pro tunc ("now fоr then") order is to clean up the records by showing what was previously done with effect from the time done; it is not to alter substantive rights. See, e.g., Spears v. Spears,
The question therefore is whether McWilliams' lien lapsed when the six months were up. We think it did lapse. The reason for the six-month limitation is to force judgment creditors to move promptly to collect their judgments, so that property does not remain encumbered by liens indefinitely, making it hard to sell; the rights of third parties might be impaired. See Celano v. Frederick,
The last issue involves the First National judgment, which the magistrate held created a lien prior to that of King's judgment. We agree with her. The only argument to the contrary is that the promissory note that First National obtained from Ionization omitted a description of the property secured by the note. The security agreement itself, however, clearly describes the property as including Ionization's patent license. The omission from the promissory note misled no one; it was immaterial.
The judgment is affirmed in its entirety.